About this Author

College chemistry, 1983

The 2002 Model

After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases.
To contact Derek email him directly: derekb.lowe@gmail.com
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October 13, 2005

Buy! It's More Expensive Than Usual!

Posted by Derek

Note: This post has a follow-up with Jim Cramer's reaction to it here.

The small-pharma flavor of the month seems to be Biocryst Pharmaceuticals, but it's not one of their current development projects that has everyone jumping up and down. It's a drug that failed its Phase III trials two years ago. Despite the best efforts of various stock newsletters and of multimedia stock tout Jim Cramer, though, I'm managing to resist the company's stock.

The words "avian influenza" are the missing piece to this puzzle. The drug, peramivir, is a neuraminidase inhibitor developed as a flu treatment, which is the same mechanism as the marketed drugs Relenza and Tamiflu. With the current worries about a possible pandemic, antivirals of all sorts are getting a second look.

In this case, you have to go back a few years for the first look. Peramivir was in Phase II trials during the late 1990s, and in 1999 the results were announced: not too bad. Their endpoint was reduction of viral titer, the blood marker of flu virus infection, and they hit it. On to Phase III, then, to see if that effect was worth anything in the real world.

There were some rough patches. Biocryst's development partner, Johnson & Johnson, pulled out of the deal before the Phase III trials got properly off the ground. (So much for the Valentine-card sentiment about them being the "ideal partner" at the end of that 1999 press release). J&J seems to have taken a look at the market performance of the other neuraminidase inhibitors and concluded that they had better places to put their money.

They were probably right about that. Tamiflu and Relenza were supposed to be much more successful than they've turned out to be. I wrote about this a couple of weeks ago in the context of a Canadian effort to develop new antivirals. The Canadians make an appearance in at least one article on Biocryst, from the New York Times, which also talks about the unhappiness of the smaller companies (Gilead, Biota) that first discovered Tamiflu and Relenza:

Tamiflu's inventor, Gilead Sciences, a California biotechnology company, told Roche in June that it wanted to take back the rights to the drug, accusing Roche of a "consistent record of inactivity and neglect" since the medicine was approved by the F.D.A. in 1999.

A Roche spokesman, Terence J. Hurley, said the company had fulfilled all its obligations to Gilead to promote and manufacture the drug and the dispute was in arbitration. . .

Biota, which is based in Australia, filed a lawsuit there against Glaxo last year, saying it did not adequately try to market Relenza. After the drug's first year on sale, "essentially all promotion was stopped," Mr. Molloy said.
Biota is seeking about $300 million in royalties it says it would have earned if Glaxo had done an adequate job. (Biota has now teamed up with Sankyo to move Sankyo's version of Relenza forward under a $5.6 million grant from the National Institutes of Health in the United States.) Glaxo denies Biota's accusations in the case, which is headed toward arbitration later this year.

"We lost a lot of money, quite frankly, promoting it, and the demand wasn't there," said David Stout, Glaxo's president for pharmaceutical operations.

I especially like that last quote, since I thought that the drug industry was always supposed to be stampeding people into buying stuff that they didn't need. Maybe Glaxo could hire Marcia Angell as a consultant to show them how it's done. Just thinking out loud here. . .ah, what a match it would be. . .

OK, where were we? Ah, back in early 2000, as Biocryst was preparing to go it alone in their Phase III effort. They did manage to get things off the ground, but the results were very disappointing. The endpoint this time wasn't just reducing viral load, but reducing flu symptoms. And the drug managed to decrease the time to improvement of symptoms by. . .about half a day, with no statistical significance, and this at doses up to 800 mg/day. They dropped the compound immediately, and rightly so.

Although that press release doesn't go into the details, Biocryst has told the press that one reason that peramivir might have failed was poor blood levels after oral dosing. I'm going to reserve judgment on that explanation, because the blood levels were certainly high enough to go through Phase II and Phase III trials – blaming them now sounds a bit ex post facto. Injected versions of the drug seem to perform well in rodent models of avian flu infection, and they're looking to get a human trial going via the same route. (This was an option before, too, of course, but the drug had no commercial chance as an injectable versus two non-injectable compounds as competition). And in all the noise about injectable peramivir, I haven't heard anyone say how it performs versus injections of Tamiflu or Relenza, either. Surely they can be formulated for it.

The prospect of a flu pandemic has changed things, but the problem is, it's too soon to say if people are now being more realistic or just more hysterical. In the last few weeks, though, I think things have tipped toward the latter. Avian flu, if it crossed over into some highly infectious human form, could be very bad news. But we're not seeing that happen (yet) with the current bird flu. It's worth remembering that flu viruses of this type have already crossed over into humans in recent years without taking off around the world. That doesn't mean that it can't happen, but it does mean that it's not inevitable.

So, no one knows how likely a pandemic is, when it might occur, and how it might behave. It's prudent to take a look at marginal compounds like peramivir, whose possible use against avian flu was being spoken about years ago. But it's not prudent to buy, or urge others to buy Biocryst's stock after it's already tripled in price. Looking at that price and the implied value of peramivir, The Biotech Stock Blog says:

"An NPV of $350 million, for example, implies $900 million of sales next year at a 50% gross profit and discounting back 15%. If you assume there is risk associated with the company realizing future cash flow from peramivir, then the implied future cash flow is considerably larger. For example, handicapping the likelihood of BioCryst winning a government contract and selling product next year at 50%, implies BioCryst sells $1.8 billion worth of peramivir next year!

Any way you slice it, the expectations for BioCryst are wildly optimistic based on the current stock price. This is not to say that peramivir does not ultimately become a successful drug or that there isn't money to be made on BioCryst. Ultimately, however, reality will come back to the stock and the fast money will go elsewhere. When the music stops, you don't want to be the one without a chair."

(Link via The Stalwart). I agree with this analysis completely. Would Jim Cramer, in between shouting into the microphone and waving his arms, care to comment on these numbers? Or are we going to have a historial re-enactment of 1999, with Biocryst playing the part of Viropharma and Cramer taking on the role of Tokyo Joe? Since his analysis of BCRX so far includes the phrase "Trading is all about the buzz", that's just what we might be in for.

I made a lot of money shorting VPHM back then, and (although I haven't yet) I'm tempted to go short BCRX now. I wonder if there are any shares left to borrow?

I've made my money today and STILL have a position riding the wave. Interesting article though. Must remember, what people do and why they do it will always be hard to predict -- what's logical and fundamental may not hold in an open market where people's fears, anticipation, etc. hold fast.

Your analysis should take into account Jim Mcamant's, who says that current valuation does not recognize Fodosine and BCX-4208 programs.

The idea of shorting at this point seems silly. Not because the stock is a good buy, but because to short it means you are betting that what is driving the stock, hysteria over a pandemic, will drop off. No doubt it will, provided no pandemic. BUT two points. First, you can't say when--next week? Two months from now? A year from now? Shorts rely on being right in the short term, no pun intended. To short this is to throw darts.

Second point: even if popular hysteria drops, government preparedness may remain in gear, pushing development, potentially stockpiling and potentially, the continued rise of the stock price.

You've made a good case against buying, but it's a far cry from a case for shorting.

Couldn't agree more. Cramer's tout of BCRX reminds of his hurricane frenzy small-cap pick Capstone (CPST). It it the typical over-hyped boom and bust as a stampede rushes to buy first, and figure it all out later. And, when they do, it ends badly.

Of course, in the mad rush to invest in "Avian Flu" stocks, the shares of Gilead and Glaxo have barely budged this past week. Profitable pharma companies with actual approved products seem to be ignored by the small investor who would rather gamble on a small-cap, than invest for more reasonable gains in a proven company. 1999 indeed!